Insurance Basics

Annuity - Definition & Meaning

Annuity - Definition & Meaning

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For individuals looking to plan for retirement, there are a variety of options. Annuities are one of them. An annuity is an insurance product that pays out regular income. It is often used as part of a retirement portfolio.

What is Annuity?

An annuity is a contract aimed at generating steady income during retirement, where in lump sum payment is made by an individual to obtain certain amounts immediately or at some point of future.

How Does An Annuity Work?

  1. The individual begins by making a lumpsum investment in the annuity plan.
  2. The annuity then makes payments to the individual on a future date or series of dates. The income can be doled out monthly, quarterly, annually or even as a lump sum payment.
  3. The income payout is determined by a number of factors, including the tenure of the annuity.
  4. The individual can opt to receive the income payments for the rest of his life or for a fixed period of time.
  5. The income depends on whether he has opted for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of the annuity's underlying
  6. investments (variable annuity).


Are The Types Of Annuities?

There are types of annuities – essentially two ways in which the individual receives the annuity payout:

  1. Immediate annuity

    – he begins to receive payments soon after the initial investment. This is ideal for someone approaching retirement age.
  2. Deferred annuity

    –it accumulates money as opposed to paying out annuity regularly. Deferred annuity can be converted into immediate annuity based on the individual’s preference.

What Are Tax Implications Of Annuities?

Annuities do not offer any tax benefit to policyholders. It is added to income and taxed at the marginal rate of taxation.



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